Log Market - April 2011

The strong timber market has resulted in a 19.5% increase in total New Zealand roundwood removals in 2010 to an estimated 24.8 million m³. This was due to high volumes of log exports which were up 23.4 % to 10.9 million m³.

Export Log Market

The ANZ Commodity Price Index hit a record high in March, lifting 4.7% for the month. This is the seventh monthly rise in the index in a row. Lumber and logs were reported as having monthly increases of 7% and 3% respectively. Woodpulp prices were unchanged for the month.

April saw a $3-10/JAS m³ lift in at-wharf-gate-prices driven mainly by increasing prices in China; "A" grade is reported to be around USD160/JAS m³ CFR, with some suppliers achieving higher prices. The NZD/USD exchange rate has had a roller-coaster dip and rise during the past two months and is now at highs not seen since last October. At this stage, the higher NZD has not ill-effected New Zealand at-wharf-gate prices.

China continues to be a strong market driver and although demand is also strong in India, waiting times at Indian ports are increasing which can increase shipping costs considerably.

Korean demand is robust.

There has been increased enquiry for log supplies from Asia-Pacific wood processors in anticipation of reconstruction demand from the earth-quake/tsunami ravaged areas of Japan.

An unusual aspect of the China log market this year is little sign of the seasonal softening of the market typical at this time of year. Most commentators are now forecasting strong prices through the end of the second quarter.

Whilst there has been plenty of commentary about the significant reductions in supply of Russian logs to China, the other supply-side squeeze is coming from domestic logs. In an effort to protect the environment, reduce carbon emissions and build domestic timber stocks, China is locking up large areas of formally production forest. It was recently reported that northeast province of Heilongjiang has banned logging for ten years in the country's largest forest, covering some 430,000 km², effective immediately.

An interesting aspect of the market is the very strong pricing currently being experienced in stumpage sales. With these sales the purchaser makes a fixed price offer for the standing timber and arranges its own harvesting and transport of logs to market. Recent sales have been characterised by strong bidding and top bidders are often parties planning to export the logs to either China or India. This method of sales can, if carefully structured, offer a lower-risk option for forest owners seeking price certainty. The downside is not participating in any continued log price rises should they occur.

Ocean Freight Rates

Shipping rates out of New Zealand have been relatively stable over the past month even though the Baltic Dry Index (BDI) has declined. The earthquake and tsunami in Japan reduced short-term demand for bulk shipping (e.g. coal and iron ore) but his is expected to rebound quickly. South American grain exports have also slowed recently. As previously reported in Wood Matters, the BDI is dominated by the Panamax and Capesize sectors (large bulkers). These sectors have experienced the greatest increase in shipping capacity (new-builds minus decommissions/scrapping) - some 30% in the past year. This makes the BDI very sensitive to any drop off in demand. Due to much lower number of new-builds in the Handy-size sector and strong demand for these ships (from New Zealand, as well as Oceania and the North America), this sector is maintaining relatively strong pricing levels.

Domestic Log Market

April was the start of the second quarter and this saw more upward movement in domestic log prices (which tend to be set on a quarterly basis). Significant increases were seen in structural grades as mills reduced the gap with export log prices. Pruned logs also increased to a lesser extent, and there was a slight average increase in domestic pulp log prices.

During the last quarter of 2010 sawn timber production fell 151,000 m³ when compared with the September 2010 quarter. This was mainly due to the annual shutdown for maintenance over the 2010 Christmas break and a high stock holding in the September 2010 quarter. When compared to the December 2009 quarter, sawn timber production was up a small 2.8%.

Also during the December 2010 quarter total sawn timber export volumes increased 15.3 percent to 599,000 cubic metres. Strong demand from China continues with volumes up 80.7% to 192,000 m³.

Whilst some New Zealand wood processors are benefiting from either increased wood products prices from Asia or the more favourable NZD/AUD exchange rate, others are more exposed to soft demand and prices in New Zealand. Those with North American exposure are also facing soft demand, recovering (but still historically low) prices and a relatively unfavourable NZD/USD exchange rate – and only the promise of a strong rebound in demand and price based on improving fortunes in the US property market.

The New Zealand economy is poised to benefit from the increased rural income that will filter through the economy from high agricultural commodity prices. In addition, there will be a boost to the timber sector from the reconstruction work in Christchurch. Despite this, however, it seems likely the high current log prices could be a catalyst for continued rationalisation in the domestic wood processing sector.

Indicative Average Current Log Prices

Log Grade

$/tonne at mill

$/JAS m³ at wharf gate

Pruned (P40)

145

Structural (S30)

117

Structural (S20)

104

Export A

131

Export K

125

Export KI

118

Pulp

57

Note: Actual prices will vary according to regional supply/demand balances, varying cost structures and grade variation. These prices should be used as a guide only.